Investing in shares for their kids

Don't you have to declare tax on the coupon payments for bonds? I've not bought bonds before but can't see the difference between coupon payments vs dividends, ie both should be taxed by ATO.

Happy to look at bonds, any suggestion on which bond PDS to take a look at for beginners?

 

I use index bonds via ETF, but not for the kids, they are fully shares and divvi reinvesting being so young

 

Thank you for sharing your experience with this.
Which investment bond provider did you go with? I am curious to see what products are on offer, especially with Vanguard underlying assets.
The good thing with investment bonds is the ability to retain control over the monies invested as well as the greater choice of underlying assets, such as international exposure as you've mentioned. Plus the planning aspect is very nice too. From memory assets can be transferred to kids when they reach 25 years of age, which could be a better age to do this.

 

I am with Austock & NextGen (they've been merged to Australian Unity). Nextgen has Vanguard Manager as investment option. From my understanding they keep updating their investment options. Investment bond has great assets control and it doesn't have to to be assigned to child.
I am not licenced to give advise but can tell you what i did to select them. Good thing for me was I was focusing on investing in international equities so was scanning only bonds which has these options. From morningstar website I looked at all companies providing Aust. bond and shortlisted 3-4 in a week time and then read through PDS over the week after and decided which one to go for. Signed application forms and it was all done...must say both companies
were surprised that I wasn't pursuing this via fin. planner nonetheless they were efficient in answering my queries.

For the beginners I would say look at ASIC moneysmart website and read the insurance bonds and understand how it works. They are paid investments and nothing have to declare in tax unless of course you liquidate them, if you do they come with tax offset. Most companies allow you to move between their investment options without any tax
consequences and its tax free after 10 years.

 

Just came across this article that compares all the different options for those investing for their children. Most, if not all of the options were already mentioned in this thread but nice to have it all explained in one article.

 

Thanks for this. I found it a balanced overview that included some discussion on tax considerations.

 

Investing for your kids or grandchildren

Investing for your kids or grandchildren – Part 2

Investing for your kids or grandchildren – Part 3

From the Switzer site

 

One of the younger kids portfolios, only recently moved TD to shares

 

We also did this, after some months looking at different investment vehicles.

. We had a facebook exchange recently with some interstate friends on this. You're so correct, with the best of parental intentions, it will still be up to them to listen, or not.

 

Each to their own but I didn't invest on behalf of my children's name from my funds.

They did receive a bequest from a grandparent via a Will, which so badly written I could have just plonked the funds in my account, spent it and they would have been none the wiser.

However, I did invest in shares - yep, LIC's - as Authorised Trustee. All dividends were DRP and, as they were taxed as adults from the get go, they started to receive refunds for the franking credits which were also reinvested.

One decided to sell their holdings once they were over 18 while the others have kept going at it. I suppose seeing funds close to a six figure amount was too tempting. I suspect the one who sold may be regretting it now but that's their issue. They were always informed about what I had done, why and the benefits.

Now they are also beneficiaries of a T/Trust and are also my nominated beneficiaries of my Will. I reckon they are on a pretty good wicket but a couple of them may not fully realise it.

 

Thanks @Redwing

Second article tells the way to avoid CGT:-
"While there is no law that specifically says that shares cannot be owned by minors, some companies have a clause in their constitution that prohibits the registration of shares to minors. So, the ASX through CHESS has adopted this convention and prohibits direct registration to minors.

This means that in the absence of a formal trust, you have to open the account with a broker in your name, and effectively designate your child/grandchild as the beneficiary by placing their name is the account designation field.

The account will be set up, and shares registered, as follows:

Frederick John Smith Parent/grandparent

<Mary Jane Smith A/C> Child/grandchild

In law, you will be the legal owner, while the beneficial owner will be your child/grandchild. When your child turns 18, you should be able to complete an ‘off-market’ transfer that changes the ownership legally to your adult child. As there will be no change of beneficial ownership, there shouldn’t be any capital gains tax to pay."

 

On a different note -while back I heard one of my colleague mentioning about transferring an IP to/under his Son's name before he turns 26 also provide some tax related benefits ??! - Is there such thing or have I heard something wrong??

 

What software is this?

 

Looks like cloud based solution - Sharesight

I use it for my own portfolio. Highly recommend it. It's free if number of securities is no more than 10.

Cheers,
Oracle.

 

How to invest for children and grandchildren

Noel Whittaker

 

Yep, basically keep a spreadsheet.

 

What if i invested in my name as trustee for the child, and borrowed funds at residential mortgage rates from a seperate split to fund the initial investment. Dividends would be payed to a savings account in the child's name, interest on the borrowed funds would be drawn from the same savings account in the child's name. Partial DRP election would be used (or not) to optimise cash in the savings account to a number approaching zero, and hence grow the capital.

Would the interest on the borrowed funds be likely to be deductable against the income from the investment in the child's name? Of course a tax return would need to be submitted on behalf of the child.

If no, would a formal loan agreement make any difference to the deductibility?

My main rationale for this is to teach the child about investing and compounding in a way that they have tangible hands on involement. In my experience most/many people learn more effectively from doing.

P.s. I realise the risk of the benificial owner of assets being different to the holder of the debt.

 

The child would be taxed and interest deductible to the child, but it is likely the income would be positive or quickly positive.
Who would the loan agreement be with? You cannot contract with yourself.

And what would the advantage of this be over you acting as trustee of a discretionary trust?

 

I assume no loan agreement would be required as it doesn't matter who's name the loan is with, it is the (beneficial) ownership of the income producing investment purchased with the borrowed funds that matters?

Good point! Assume not required. See above.

1. Simplicity, cost and presume no specific requirement for asset protection that a discretionary trust would offer (that I can think of).

2. Also, if I was previously the child, I would want my financial affairs to be separable from my siblings without having to sell the % of assets attributable to me and incur CGT. Multiple discretionary trusts could be the solution to this, but presume also there are more than 2 children so refer to point 1.

Easily addressed with either appropriate investment selection, tactical use of BSPs, or additional borrowings and investment

At least this is how I see it. Open to counter points!

 

a loan agreement may be needed, the trustee would be the one borrowing.

I can't see income being neutral or negative with something like this unless in the short term.
If borrowing with no prospect of income the interest would not be deductible - such as if using bonus share plans.

I myself would be using a separate discretionary trust per child. Upon my death pass the control of the separate trusts to each child, or their mother for added asset protection. Before my death i would control the trusts and consider any requests from the kids for income or capital. I would also incorporate a bucket company for each possibly.